China Accelerates Bad Debt Writeoffs: The Ponzi Fractures Widen

Financial stress related to Ponzi financing and other bad debts in China is readily visible in numerous places. One result is China’s Big Banks Double Bad-Loan Write-Offs.

China’s biggest banks more than doubled the level of bad loans they wrote off last year, in a sign that financial strains are mounting as growth in the world’s second-largest economy slows.

The five biggest Chinese banks, which account for more than half of all loans in the country, removed Rmb59bn ($9.5bn) from their books in debts that could not be collected, according to their 2013 results. That was up 127 per cent from 2012, and the highest since the banks were rescued from insolvency, recapitalised and publicly listed over the past decade.

The sharp acceleration in write-offs is the latest indication of the turbulence now buffeting China’s financial system. The bond market suffered its first true default in March, two high-profile shadow bank investment products were spared from collapse by last-minute bailouts earlier this year, and a small rural lender suffered a brief bank run last week.

Data also point to a deeper economic downturn in the first quarter than expected, putting China on track this year for its slowest growth since 1990.

The deterioration has fueled expectations that Beijing will act soon to shore up the economy. “Increasing downward pressure on the economy should not be neglected,” Li Keqiang, China’s premier, said last week. “We have policies in store to counter economic volatility.

Anecdotes from China

There was an interesting post on the Motley Fool titled Random China Observation, by “GoCanucks” who was in China for a month on family business. He talks about the property bubbles and the readily apparent stress. He concluded …

The bubble is so obvious (admittedly it felt that way 3 years ago), but when I asked my friends “what if”, the common answer is “the government won’t allow it to happen”. And every time I hear that phrase, I can’t help thinking of the following quote from Michael Lewis’s essay on Irish RE bubble: “Real-estate bubbles never end with soft landings.”

Policies to Counter Economic Volatility

Yes indeed, central banks have “policies in store to counter economic volatility”, and they use them. It was those policies in the wake of the dotcom bust that led to an even bigger debt bubble and subsequent housing crash.

The Bernanke Fed created the biggest equity and corporate bond bubble in history in the wake of the housing crash.

China has acted at every turn to counter the slightest unwanted slowdown, while maintaining ridiculously high growth targets. Those growth targets led to Ponzi financing of cities that are vacant, the world’s largest mall (yet devoid of customers), airports and trains that go unused.

These kinds of malinvestments are the direct result of “policies to counter economic volatility”, yet China’s premier, the Fed, the Bank of Japan, the People’s Bank of China, the ECB, the Bank of England, the Bank of Canada,  the Reserve Bank of Australia, etc, all arrogantly believe they can “counter economic volatility” without consequences.

Logic alone suggests the notion that anything can be centrally planned without huge damaging consequences is as ridiculous as it is arrogant. History proves it.

Mike “Mish” Shedlock